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Crime Software The Almighty Buck The Courts

Norwegian Day Traders Convicted For Manipulating Computer Trading System 299

An anonymous reader submits news of the conviction of two Norwegian day traders, Svend Egil Larsen and Peder Veiby, who were on Wednesday fined and given suspended sentences (Norwegian court, Norwegian document) for cleverly working out — and cashing in on — the way the computerized trading system of Interactive Brokers subsidiary Timber Hill would respond to certain trades. They used the system's predictable responses to manipulate the value of low-priced stocks. The pair have gotten some sympathetic reactions from around the world, and promise to appeal.
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Norwegian Day Traders Convicted For Manipulating Computer Trading System

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  • by AliasMarlowe ( 1042386 ) on Friday October 15, 2010 @02:15AM (#33905062) Journal
    So these guys figured out how to second-guess somebody's trading algorithm. How in hell is that a crime?

    Many mechanical trading algorithms are also trying to second-guess the actions of other market participants in order to make a profit. These guys just did the same, apparently in cases where the trades made by a particular mechanical algorithm would be big enough to move the market themselves.

    Mechanical trading algorithms are either fair game, or preferably, should be illegal. If mechanical trading algorithms are legal, then what these men did should definitely not be illegal.
    • by hkmwbz ( 531650 ) on Friday October 15, 2010 @02:18AM (#33905074) Journal
      I read about this case a while ago. It seems amazing that the people who are actively manipulating the market with thousands of automatic trades every minute are being protected, while the little guy who figured out how to win over the machines gets convicted. The idiocy of allowing robot traders to roam free should be very obvious after it caused the market to take a steep dive for no reason. But no, robot trading is being encouraged! Money talks.
      • by phantomfive ( 622387 ) on Friday October 15, 2010 @02:40AM (#33905154) Journal
        That is exactly what I came here to say. I can be grudgingly convinced to accept auto-trading, after all it only takes a small portion from me since I make longer term trades, but when they convict people for this.......my support is gone. Where do I sign the petition to get rid of high speed trading? This is garbage.
        • by pyite ( 140350 )

          I can be grudgingly convinced to accept auto-trading, after all it only takes a small portion from me since I make longer term trades,

          Or it may give you a small portion. By providing liquidity, the price might have been 1 cent cheaper for you to buy than you otherwise could have paid.

          • And 1% cheaper to sell, so no difference there, except you will probably find it easier to find a buyer for your stocks.

          • Re: (Score:3, Informative)

            by EdgeyEdgey ( 1172665 )
            Liquidity is not provided because the HFT bid/offers get withdrawn.

            A HFT is like a shop assistant getting a (tiny) cut of each transaction they process. They sit in between buyers and sellers collecting pennies, like market makers but without having to guarantee a market.
      • by ultranova ( 717540 ) on Friday October 15, 2010 @05:18AM (#33905804)

        It seems amazing that the people who are actively manipulating the market with thousands of automatic trades every minute are being protected, while the little guy who figured out how to win over the machines gets convicted.

        Not really. It's just nobility closing their ranks and watching each other's backs, least a peon would become their equal.

        You didn't really think that the law was same to all, now did you?

    • by Y0tsuya ( 659802 ) on Friday October 15, 2010 @02:30AM (#33905116)
      The stock market is a casino. The banks and hedge funds is "House". As far as the government is concerned it's OK for banks and hedge funds to manipulate, but not for the little guys. If you screw with the house they wipe the floor with you.
    • by Paul Rose ( 771894 ) on Friday October 15, 2010 @08:48AM (#33906842)

      >>So these guys figured out how to second-guess somebody's trading algorithm. How in hell is that a crime?

      Not quite.

      If they had figured out how to predict where somebody else's algorithm was trading, and trade against it for profit, they would not be in trouble.

      What they did was figure out how somebody else's algorithm would react to stimulus, then entered created that stimulus, then traded against the result.

      They entered orders that had no intention of getting a trade (and indeed would have been unhappy to have traded because they were unnaturally high bids or low offers). These orders gave the impression to both people and software that the market had changed for real. The algorithm followed the "fake" data and made too high of a bid or too low of an offer. They then cancelled their "fake" orders and instantly entered real orders on the opposite side to hit the algorithm.

      This has been going in (sans computers) for decades, and is illegal in most regulated markets.

      It is similar to the idea of leaking fake news and trading against the move and then making a profit when people figured out it was fake.

    • Not that I agree but to play devils advocate. Do we really want to turn the stock market into any more of a ‘game’ then it’s already turned into. We’d have computers with billion dollar portfolios all bidding each other trying to find the others algorithms out. Remember when Proctor and Gamble and Accenture dropped like 99% of their value in just a few mins? Imagine that happening too 100s of stocks everyday as the computers attempt to trick each other into making mistakes. Now sho
  • Lunatic blogger (Score:2, Informative)

    by DerekLyons ( 302214 )

    "The pair have gotten some sympathetic reactions from around the world, and promise to appeal."

    A single blog entry from a seeming lunatic does not 'reactions from around the world' make.

    • Re: (Score:3, Insightful)

      How about 99% of the posts here?
      Those are reactions from around the world (though admittedly from seeming lunatics like myself).
  • by khchung ( 462899 ) on Friday October 15, 2010 @02:22AM (#33905088) Journal

    I didn't RTFA (of course), but how is what they did different from guess what real people would respond to certain trade and engineer to profit from that? Isn't that what every speculator is trying to do? If someone used a program to trade and other people guessed (without foul play) how the program responds and profited from it, why is that a crime?

    As for "manipulating prices", well, every investment firm is manipulating prices when they release analyst reports recommending "buy" or "sell" for stocks they own, I would like to see them prosecuted too!

  • In the USA (Score:5, Funny)

    by srussia ( 884021 ) on Friday October 15, 2010 @02:30AM (#33905110)
    FTFA:In yesterday's conviction of the Norweigan traders, the prosecution said the pair had given "false and misleading signals about supply, demand and prices"

    In the US the official body that does this is called the Working Group on Financial Markets [wikipedia.org].

    They hate it when other people cut in on their action.
  • I know these guys (Score:5, Insightful)

    by ebonum ( 830686 ) on Friday October 15, 2010 @02:32AM (#33905122)

    I know the guys at Timber Hill from before IB bought them. They are what one would calls pros. It is hard to think of them as victims. They have all the money hardware and brains a company could want. Actually, I would call Timber Hill fairly predatory. These guys were printing big money through high speed algo trading before anyone knew what that was back in 2000.

    Knowing them, I doubt they are happy that their name is in the news. Years ago, they truly didn't want any attention. The less the outside world knew, the better.

    The big issue is: this is essentially what all the high speed traders are doing. The line here is fuzzy. However, I fear these Norwegian fellows are being held to a higher standard than people who are more powerful and more established.

    • Re: (Score:3, Insightful)

      by Anonymous Coward

      Does anyone have a link to a human translated version of the Norwegian court doccument so we can get a more impartial view of the facts of this case? On the one hand we have a sensationalist news article without many facts and a blogget response with no facts and all rhetoric that claims to not be political yet says that they would be considered a liberal for making such an observation in the same sentance. I for one would like to see the facts of the case without all the opinions getting in the way from th

    • by umghhh ( 965931 )
      The line is fuzzy only because it is smeared with big amounts of money.
    • The big issue is: this is exactly what all the big boys are doing all the time.

      There, fixed that for you.
    • Re: (Score:3, Interesting)

      by gronofer ( 838299 )
      If that's the case, I'm surprised the Norwegians were prosecuted at all. Surely the complaint must have originated from Timber Hill itself, unless it involved Norwegian stocks that the regulators were monitoring. But why would Timber Hill initiate action over such a small sum of money (the article mentions £18,000 and £11,500)?
  • smartass (Score:3, Funny)

    by Anonymous Coward on Friday October 15, 2010 @02:34AM (#33905136)

    "It startled him even more when just after he was awarded the Galactic Institute's Prize for Extreme Cleverness he got lynched by a rampaging mob of respectable physicists who had finally realized that the one thing they really couldn't stand was a smartass."

  • In soviet Russia, YOU control market.
    • In soviet Russia, YOU control market.

      How did you know I was really Vladimir Putin?

      [whispers to henchman: kill him!]

  • by Anonymous Coward on Friday October 15, 2010 @03:00AM (#33905262)

    Norwegians convicted for outwitting trading system

    By Andrew Ward in Stockholm

    Published: October 13 2010 19:17 | Last updated: October 13 2010 19:17

    Two Norwegian day traders have been handed suspended prison sentences for market manipulation after outwitting the automated trading system of a big US broker.

    The two men worked out how the computerised system would react to certain trading patterns - allowing them to influence the price of low-volume stocks.

    The case, involving Timber Hill, a unit of US-based Interactive Brokers, comes amid growing scrutiny of automated trading systems after the so-called "flash crash" in May, when a single algorithm triggered a plunge in US stocks.

    Svend Egil Larsen and Peder Veiby had won admiration from many Norwegians ahead of the court case for their apparent victory for man over machine.

    Prosecutors said Mr Larsen and Mr Veiby "gave false and misleading signals about supply, demand and prices" by manipulating several Norwegian stocks through Timber Hill's online trading platform.

    Anders Brosveet, lawyer for Mr Veiby, acknowledged that his client had learnt how Timber Hill's trading algorithm would behave in response to certain trades but denied this amounted to market manipulation. "They had an idea of how the computer would change the prices but that does not make them responsible for what the computer did," he told the Financial Times. Both men have vowed to appeal against their convictions.

    Messages posted on Norwegian internet forums on Wednesday indicated widespread sympathy for the defendants. "It is the trading robots that should be brought to justice when it is them that cause so much wild volatility in the markets," said one post.

    Mr Veiby, who made the most trades, was sentenced to 120 days in prison, suspended for two years, and fined NKr165,000 ($28,500). Mr Larsen received a 90-day suspended sentence and a fine of NKr105,000.

    The fines were about equal to the profits made by each man from the illegal trades.

    Christian Stenberg, the Norwegian police attorney responsible for the case, said any admiration for the men was misplaced. "This is a new kind of manipulation but it is still at the expense of other investors in the market," he said.

    Interactive Brokers declined to comment.

    Irregular trading patterns were first spotted by the Oslo stock exchange and referred to Norway's financial regulator.

  • by Improv ( 2467 ) <pgunn01@gmail.com> on Friday October 15, 2010 @03:18AM (#33905316) Homepage Journal

    All of this is a symptom of how far the stock market has branched from its purposes - it's not just a way people have involved distributed judgement of the worthiness of societal ventures anymore, now we have huge parasites in the system, feeding on each other. When the boot comes down, I don't think we should cry. Only a few of these people make an honest living that benefits society.

    • by Tom ( 822 ) on Friday October 15, 2010 @04:23AM (#33905602) Homepage Journal

      All of this is a symptom of how far the stock market has branched from its purposes - it's not just a way people have involved distributed judgement of the worthiness of societal ventures anymore,

      It hasn't been that for at least 50 years. Speculation has been the dominant market force for a very, very long time. It just never made as much headlines until recently.

      now we have huge parasites in the system, feeding on each other.

      We've had that since the first investment companies came into existence. It took what, three weeks at best?, until someone realized that investing in the future of a company is slow and risky, while cashing in on the expectations of those who are still dumb enough to do that is faster and safer - there are few things as certain as the stupidity of a large group of people.

      • And I still don't understand what drives it.

        Take Apple stock. What's the actual value in buying Apple stock? The only value seems to be from selling it again to someone else who wants to buy it so that they can sell it again to someone at a higher price.

        Is that really it, or is there something that I'm missing?

  • If I get this right, someone is convicted for cleverly working out how a system works that cleverly works out how other systems in the market work (which is what an Algo in principle is). If I pare this down to the essentials, it seems this person is convicted of focusing on one particular trader instead of the whole market.

    That's going to be interesting from a legal perspective, because there's nothing illegal in what he has done as far as I can see, unless he had insider knowledge. It's a bit like learn

    • by plumby ( 179557 )

      Doing any action with the primary purpose of manipulating share prices is illegal, and that's what it sounds like was going on here. They sold stocks with the intent of making that system behave stupidly.

      Whether it should be illegal is another matter...

  • by awjr ( 1248008 ) on Friday October 15, 2010 @03:52AM (#33905436)

    Although you are probably not aware of it, most trading arms of the banks are at war against each other, trying to determine the trading algorythms each of them use, and deploy trading engines that take advantage of any weaknesses. It's one of the reasons you see an immense amount of mathmatical talent recruited by the Banks.

    The problem I find with this, is that, unless the t&cs they signed to indicated that they should report any flaws in the bank's trading system, then this is actually a failure on the bank's part to test their systems.

  • by carmaa ( 1006965 ) on Friday October 15, 2010 @05:36AM (#33905850) Homepage
    Synopsis:

    while (true) {
        if (stockMarket.isDown()) {
            sueHumansRandomlyToCoverLosses();
        else {
            buyStock();
            laughAtHumanMinions();<br>
            printf("Greed is 01000111011011110110111101100100");
        }
    }
  • Intriguing (Score:5, Informative)

    by The Dodger ( 10689 ) on Friday October 15, 2010 @05:44AM (#33905876) Homepage
    I'm not a lawyer and I don't speak Norwegian so I can't read the court document to find out exactly what happened. I am, however, an electronic trading specialist and I've also been a trader at a big American investment bank (one that didn't go bust, by the way, despite my best efforts).

    Rumour has it that these guys realised that there was a flawed algorithm (which turns out to have been operated by Timber Hill) making a market in illiquid shares, which set its quotes based either on the prices at which recent trades in those shares had been done, or on the algorithm's own position in the stock.

    To give some background: if you are making a market in a stock, that means you are prepared to buy from people who want to sell and sell to people who want to buy. Unless you're feeling particularly generous, you want to buy at a "low" price and sell at a "high" price. In liquid markets (i.e. where there are lots of people buying and selling), you can typically rely on the market mid price (i.e. the best bid plus the best offer, divided by two) and "spread" off that (e.g. add a cent to it to get your ask, subtract a cent from it to get your bid). As the market (i.e. the mid price) moves up and down, you can adjust your bid/ask to follow it and, if you end up buying or selling stock, you can adjust your bid/ask to make it more likely that your quotes get hit/lifted to flatten out your position (e.g. if someone hit your bid and sold you shares, you would probably lower both your bid and your offer, in relation to the market, to make it more likely that someone will buy the shares off you and less likely that you'll buy more shares).

    However, in illiquid markets and, in particular, in markets where you are the only market-maker, you may not be able to rely on a market mid, because you are the market, so it's up to you to set the price.

    So, let's say you start off with a quote of 99.99/100.01 and a quantity of 10,000 on each side. I come in and lift your ask (i.e. I submit an order to buy at 100.01, which matches against your ask) to the tune of 1,000 shares (i.e. I buy 1,000 shares from you). You are now "short" 1,000 shares, so you might adjust your price to make your bid more attractive to potential sellers - i.e. you change your quote to 100.00/100.02 - and you keep quoting with a 10,000 quantity on either side.

    I buy another 1000 shares from you. You shift your quote to 100.01/100.03

    I buy another 1000 shares from you. You shift your quote to 100.02/100.04

    I buy another 1000 shares from you. You shift your quote to 100.03/100.05

    I now own a total of 4000 shares, for which I paid a total of [(1000*100.01)+(1000*100.02)+(1000*100.03)+(1000*100.04)=] 400,100

    I now hit your bid and sell you back all 4000 shares at 100.03 for a total of 400,120

    I just made myself $20. Thanks very much. Rinse, lather, repeat.

    Now, you can see how some people might claim that I'm manipulating the market because I'm issuing orders into the market with the intent/expecation that the price will move as a result. But it's all a bit of a grey area.

    However, I might argue that I'm merely taking advantage of bids and offers that are already in the market. If the market-maker on the other side wants to quote prices that allow me to make a profit (or, more accurately, if he's been stupid enough to roll out a market-making algorithm that does that), then why shouldn't I take advantage of it?

    If this is what happened, then I'm surprised that Timber Hill decided to make an issue of it. If I'd been that stupid, I probably wouldn't want to draw everyone's attention to it. I would put the loss (which is this case appears to have been kless than $70k) down to experience, fix my algorithm and move on.

    People/banks/brokerages/traders/hedge funds do make mistakes like this. A long, long time ago, when I was younger and far more stupid than I am now, I once gave a trader a market-making algorithm that used the market

    • by grahamm ( 8844 )

      Maybe a silly or naive question, but why would any one person want to simultaneously buy and sell the same stock? If I want more of it, I will put in a bid to buy and if I want less of it then I will offer for sale. Which I do at any one time might change with the price that other people are offering or asking, but at any one time I would be either bidding to buy or offering for sale - not both at the same time.

      • Well, in an ideal world, you profit from the spread - e.g. you buy at 99.99 and sell at 100.01, thereby making a profit of $0.02 on each share. That's what happens in liquid markets, where there are plenty of buyers and sellers putting in market orders.

        It's not really all that different to what Asda does with cans of beans - buy 'em from one person and sell 'em to another for a higher price.

        There are "official" market makers on the NYSE and (I think still) on the London Stock Exchange.

    • Re: (Score:2, Informative)

      by lucifron ( 964735 )

      AFAIK this was a criminal case, and Timber Hill aren't involved beyond acting as a naive market maker.

    • I'm not a lawyer and I don't speak Norwegian so I can't read the court document to find out exactly what happened.

      I am, however, an electronic trading specialist and I've also been a trader at a big American investment bank (one that didn't go bust, by the way, despite my best efforts).

      ...snip...

      Thanks very much. Rinse, lather, repeat.

      I am not an electronic trading specialist, and I've never been a trader at a big American investment bank (but we're equal in that I've not made one go bust, by the way, but I managed it by giving it no effort at all).

      I have, however, found a bug in one of your algorithms. Lathering after rinsing doesn't work so well.

      • > I have, however, found a bug in one of your algorithms. Lathering after rinsing doesn't work so well.

        Fuck! That explains why my hair is so manky!

    • Having glanced at the curt document it looks they used this method. They were caught by an automatic monitoring system, not Timber Hill, and it's noted that Timber Hill has changed their algorithm since then (but nothing about them making an an issue out of it.)

      It looks like they started out slow, but got bolder and eventually the stock exchange shut down to investigate. Bet they got a chill when that happened.
    • Rumour has it that these guys realised that there was a flawed algorithm

      No, you just pointed out how wrong it is to use an algorithm at all. That is the flaw.

    • Re:Intriguing (Score:4, Insightful)

      by Prof.Phreak ( 584152 ) on Friday October 15, 2010 @08:48AM (#33906830) Homepage

      Here's an industry related question, how does high frequency trading benefit the general public? The push towards regnms, the push towards faster and faster executions---how does all this benefit Joe Investor? What is SEC thinking?

      I doubt Joe Investor cares if his trade executes within a microsecond or in a few minutes. I even doubt he cares that much about the 1% price difference he may enjoy (or regret) from his investment within a week.

      So why is everyone in the industry assuming Joe Investor is a day-trader with an algorithm at his desk? Even the active investors I've met keep stocks for sometime---the only "day-traders" I've met aren't in the investment business---they're there to benefit from minute-by-minute price fluctuation---leaching (by tiny amounts) the profits of long term participants.

      I guess what I'm saying is, if high frequency trading is a billion dollar industry---those billions of dollars, in small amounts, were directly taken out of pockets of long-term investors---they're the inefficiency in the market.

      • Re: (Score:3, Interesting)

        by LordNacho ( 1909280 )

        I think the main argument is that Joe Investor benefits from having more liquidity. He can buy/sell a larger amount of shares than he would otherwise. Remember many people invest via huge pension funds, which have to shift pretty large amounts of shares.

      • Re: (Score:3, Insightful)

        by m50d ( 797211 )
        Here's an industry related question, how does high frequency trading benefit the general public? The push towards regnms, the push towards faster and faster executions---how does all this benefit Joe Investor?

        The prominence of HFT does two things. Firstly, it makes the market liquid and more efficient - the difference between the prices at which Joe Investor can buy or sell a stock is probably down to fractions of a penny. Which you don't notice on the individual scale, but it improves the functioning of t

    • by xiando ( 770382 ) on Friday October 15, 2010 @09:25AM (#33907128) Homepage Journal

      If this is what happened, then I'm surprised that Timber Hill decided to make an issue of it. If I'd been that stupid, I probably wouldn't want to draw everyone's attention to it. I would put the loss (which is this case appears to have been kless than $70k) down to experience, fix my algorithm and move on.

      It must be noted that TMB did not react or care at all. It was Oslo Stock Exchange (OSE) who made an issue of this and made The National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway (ØKOKRIM) take it to court. Timber Hill has made no comment, refused to appear in court and generally appear to want this to quietly go away.

  • Clarification (Score:2, Informative)

    I am Norwegian, soon-to-be a lawyer and a computer scientist ( with some experience with day trading, eps. in the norwegian market )

    As many of you have pointed out, and wanted to know: What are these young men charged with and convicted of ? Is it winning over an algo? Outwitting another "player in the market" ? Winning over the "big guys" ?

    Of course not. It is not illegal to be smart, nor to make money in the stock market by "outwitting" someone - or something.

    In the Norwegian court document refe
    • Re: (Score:3, Insightful)

      by Magada ( 741361 )

      Sorry, what? They manipulated the market by buying and selling stock? How could they be convicted for trading? How can a buy or a sale constitute a "misleading signal"? Misleading whom? In relation to what fundamental truth?

  • So when is this "Norwegian Day" ? My calendar only has american holidays on it (Oh yeah theres a few from Canada

    Nobody has said anything about it around here, and you'd think they would being there is a lot of people with Scandinavian heritage.

On the eighth day, God created FORTRAN.

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